My Quarterly P2P Lending Results – Q1 2014

One of the most popular features on Lend Academy is my quarterly return updates. I provide everyone with a look inside my own personal portfolios and share exactly how they are doing. I am committed to maintaining this transparency because I know that investment return is what interests most readers.

Before I get started I want to point out one thing for some of our newer readers. My six main accounts have been established a long time. My main Lending Club account is approaching five years old now and at Prosper it is almost four years old. These accounts are mature and have suffered hundreds of defaults. The returns are now relatively stable as you can see if you compare the results to my previous returns.

Overall P2P Lending Return Now at 12.44%

Long time readers will notice something different in the table below. I have included my six regular accounts at Lending Club and Prosper but there are two new line items that have not been included before. I opened my first IRA account at Prosper in February with a $50,000 rollover. That account was around 70% invested by the end of March. Also, for the first time I have included my investment in the Direct Lending Income Fund (profiled here). It has been almost a year since I opened that account and it has been performing very well and I am including it here to give readers a more complete picture of my p2p lending investments.

I am separating out these two new investments so readers can see the overall impact they have. Interestingly, my overall return on my six main accounts has remained very steady since my fourth quarter update – it is at 11.87% now up from 11.85% in December. The Direct Lending Income Fund is the only reason my returns have increased to 12.44%.

You can click on the image below to see it at full size. You can also click here to see the table with the regular and adjusted/seasoned returns columns.

Here are a few points to keep in mind as you are looking at the above table.

All the account totals and interest numbers are taken from my monthly statements that I download each month.

The Net Interest column is the total interest earned plus late fees and recoveries less charge-offs.

The Average Age column shows how old, on average, the notes are in each portfolio. Because I am reinvesting all the time this number changes slowly.

The XIRR ROI column shows my real world return for the trailing 12 months (TTM). I believe the XIRR method is the best way to determine your actual return.

The two new accounts have been separated out to provide a level of continuity with my previous updates.

I do not take into account the impact of taxes.

As I do every quarter I will now delve into each account in a little more detail.

Lending Club Main

This is my original account that was opened back in June 2009 with just $500. Over the years I added an additional $24,000 to bring my total investment here to $24,500. Like many investors when I started I invested in a conservative way, focusing on B and C grade loans with some As. But for several years now I have been focused on the C-G grade loans because I am comfortable with being a little more aggressive.

One useful feature that Lending Club introduced late last year is the Understanding Your Returns page. There is a link to that page on the main Lending Club account screen underneath the NAR number and it shows you how you are doing compared to other similar investors. You can see my large blue dot in the graphic above. The red dots are those accounts with a similar weighted average interest rate (so they are similar in risk) and the dark blue dots are all accounts. I have filtered the image above for those accounts with at least 500 notes.

One of the other changes that Lending Club implemented late last year was the introduction of Adjusted Net Annualized Return. This is where Lending Club discounts your percentage return as well as the value of all the notes in your portfolio based on their late status. For example, the value of a note that is 16-30 days late will be discounted by 49% based on Lending Club’s default settings. This has the effect of reducing the expected dollar value of your account and the return percentage. You can easily toggle between regular and adjusted returns on the screen with the On/Off button on the main account screen.

Lending Club Roth IRA

I opened this IRA account in April 2011 and my strategy here has been completely focused on the D-G grade loans with 60% of the portfolio in D-grade loans. Consequently, it has a weighted average rate of 18.94% which is the highest of any of my Lending Club accounts. I was pleased to see my XIRR ROI climb in the past quarter a full percentage point as I received fewer defaults. I added another $5,500 to this account in April when I made my 2013 IRA contribution.

Lending Club Traditional IRA

This is my largest account at Lending Club or Prosper and it also happens to be my best performing account. This account is in my wife’s name, I opened it in April 2010 when I rolled over several 401(k)’s and IRA’s that my wife had accumulated over the years. The total initial deposit was $53,274 and I have not added any money since the account was opened.

This account began as a Lending Club PRIME (now called Automated Investing) account with a moderate risk approach – so it was primarily B and C grade loans. All those initial loans have since matured and for the last two and a half years I have been focusing completely on the D-G grade loans. The returns for this account continues to be very high with a real return of 13.61% in the past 12 months, down from 13.88% three months ago. I think the returns here will continue to decline slowly before stabilizing in the 11.5%-12.5% range. But right now this is my best performing account at either Lending Club or Prosper.

Lending Club Roth IRA – 2

This is my wife’s Roth IRA account that was opened at the same time as her traditional IRA in April 2010. This was a Lending Club PRIME account until about eight months ago when I decided I wanted to get more aggressive with it. Although when Lending Club enhanced their PRIME service last December to allow custom saved searches I switched it back to PRIME. Now, it runs my Super Simple Lending Club filters and the returns are slowly but steadily edging up.

Prosper Main

I opened my first Prosper account in September 2010 with $1,000 and over the next two and half years added regularly to this until I had deposited $50,000. I will no longer be depositing any new money, though, as this is a taxable account and I am placing all my new investments going forward into my IRA.

This account has been focused on C, D and E grade loans from the beginning and for a while I had returns in the high teens. But, like all my accounts, defaults have impacted returns and now they have settled in to the 11-12% range.

Prosper – 2

This account is a good example of what can happen when you are not fully diversified. This has been something of an experimental account for me. It is a taxable account in my wife’s name where I have invested just $2,000. I have been very aggressive in this account with a weight average interest rate of 26.6%, the highest of any of my accounts. But at a value of around $3,000 this is not as diversified as I would like with only 147 active notes right now.

In the last 12 months my real return has dropped from 15.6% to just 7.2% today. There have been a rash of defaults in the last few months that have dramatically impacted returns. I like to have at least 200 notes in an account, preferably more, to be completely diversified. But I am going to leave this account as is and see if I can get it back to double figures. I expect it will continue to be quite volatile.

Prosper – New Roth IRA

Last quarter I opened a brand new Prosper account. I rolled over part of my IRA into Prosper and began investing. I decided with this account that I wanted to be a little more conservative. Every other account I own is investing aggressively in the highest interest loans. I think it is prudent to balance this out a little with a less aggressive account. So, this new Prosper account will be investing across the board from AA-HR, but with an emphasis on A, B and C grade loans. This account will be managed by Lend Academy Investments, my new investment company, in our balanced SMA offering.

Direct Lending Income Fund

Also new with the quarterly update is my investment in the Direct Lending Income Fund. This fund invests in small business loans, primarily short duration loans of 12-18 months, which I consider a nice diversification away from consumer loans. I made this investment in May of last year so I have had nearly a year of performance in this fund. This is a taxable account, so come tax time I have a hit on the interest earned here but I am very happy with how this fund has been performing. As I said earlier it is the only reason that my overall return have increased from 11.85% to 12.44%.

Final Thoughts

Overall, I continue to be very pleased with these investments. I am not investing new money in any other asset class, only p2p lending these days, as I continue to ramp up the percentage of my assets here. Overall, these accounts are aggressive and I am investing knowing full well that during a recession the riskiest loans will likely be hit the hardest. This is one of the reasons I wanted to balance things out a little with a less aggressive account – my new Prosper IRA.

As I do every quarter I want to highlight the net interest number, a total of $34,577 now. While I realize a good chunk of this is taxable this is the real return on my investments. The percentage interest numbers are nice to highlight but it is the dollars earned in interest that is money in your pocket.

As always I’m sure that everyone here appreciates you sharing your personal results & opening them up to scrutiny.

I wonder if you’d care to speculate on the causes of the following. Regarding your LC accounts, it appears that the difference between your calculated results & LC NAR are pretty small………….except in one case (LC Traditional IRA) where you appear to outperform their non-adjusted figure by a staggering 3.1%. This is despite the fact that LC NAR doesn’t account for any cash drag which just in itself would otherwise subtract their numbers by easily another half percent, making the difference even wider.
As we look at the other LC accounts we see a rather different picture.

LC Main your XIRR at 11.54%, LC at 11.23%, a difference of 0.31%
Roth IRA your XIRR at 12.32%, LC at 13.87%, a difference of 1.55% their number over yours.
Roth IRA 2 your XIRR at 8.01%, LC at 7.71%, a difference of 0.3%

Now if your super performing Traditional IRA acct was a very small account or a very young account, the way above average performance wouldn’t even raise my eyebrow. But obviously that isn’t the case at all. Care to speculate as to the cause?
Pls. understand that I am not suggesting anything here…………Imo, the 3.1% difference just doesn’t make sense.

Good question Dan. I actually posed that very same question to Lending Club some months ago because I wondered the same thing. The explanation I received was that the NAR is an annualized number that takes into account all the notes you have ever invested in. My XIRR number is only looking at the trailing 12 months.

You may recall that a couple of years back the NAR on this LC Traditional IRA account was down around 8% and XIRR was in the 6-6.5% range. This was back when I was investing in only A, B, and C grade loans. This has skewed the number lower than it should have been. This account has seen the most dramatic shift in strategy which is why there is the highest delta.

Interesting. I measure my returns differently so I hadn’t given your method much thought until now. So I can certainly see how trailing 12 months is important, but if someone asks you how any account has done since your initial investment, you would have to run some numbers & get back to them, correct? Because you don’t really know off hand, am I right?
Let’s face it, we’ve both been doing this for almost 5 years now. As the years add up I’m thinking that some way to indicate some rough overall or aggregate performance for the lifetime of an account is something to consider. Just a thought.

Your questions some are good, some are great, and some are skeptical . Peter is doing so many things for free for us and share his insights for all of us who is interested in p2p. I just wish you show some appreciations for what peter is doing and what he has done. How could you ask for something that nobody can answer because p2p is so new . You invested on p2p for 5 years , where is your transparency? what is your 5 year returns? can you spend many hours and tell us the answers? Just a thought is demanding and no appreciations whatsoever.

Dan has been posting here for several years and many of his comments are indeed quite critical of me, but the comments here were not that way at all. Indeed he raised an interesting question about overall returns. While I appreciate the sentiment in defending me I didn’t think it was necessary here.

As I expected you provoked a strong response from Dan which you can read below.

I’ve been reading your blog casually for a few years now and you never cease to keep it interesting. Thank you for that.

You mentioned what filter you were using for the Lending Club Roth IRA – 2 (Super Simple), but what about the other LC accounts? I’m sorry if I missed it in the body of the post or in a previous blog post. I saw your 2014 topic where you spelled out your various filters but I missed if you mentioned which accounts are associated with them.

Now, my Lending Club Main account I invest in a variety of ways. Right now, it is mainly with P2P Picks through Bluevestment. And my new Prosper Roth IRA is a custom filter I developed for our investment management firm.

Thank you for the very helpful reply. You mention in the filters article that LC 2 and 3 are mutually exclusive. In your comment you say you are using both on your Traditional IRA account. Does that mean you switched from 2 to 3 in your traditional IRA at some point or vice versa?

Hi Vic, I am actually using both LC Filter 2 and Filter 3 to invest in my traditional IRA account. I am doing this through Nickelsteamroller.com and it is investing through the API. If you want to use LC’s Automated Investing tool you can only use one filter at a time, this is one of the many advantages of investing through the API.

I can understand why a newcomer like yourself would feel the need to defend Peter, but your comments are so far from reality that it begs a response. For starters, if you would bother reading the first sentence of my first post on this topic you will notice that I do indeed thank Peter for sharing this. Is that not appreciation?

Also, this site is part of Peter’s business. He is not doing this for free, as you stated. This site is part of what makes Peter an important person in this industry. He has put a lot of work into this blog, but it is not done for free, nor has he built this blog alone.

I have spent hundreds of hours on this site in the past 5 years. I have written hundreds of posts, comments etc for FREE on this blog. I & some others here are the ones who have done this for free. Unlike flag waving cheerleaders like yourself, I have often taken the unpopular minority positions here in order to provide some balance. Where’s the appreciation for that?

You are new here, so may I suggest you hold your tongue about matters where you have minimal understanding. Do a little bit of research into the history here & a more careful reading of a persons words before writing things that just pop into your head.
I will leave it at that.

Dan, You can read my reply to Shu above. As I said, your comments on this post were quite benign and in fact added to an interesting discussion, which is always my hope for the comments section.

It is true that this blog has become an important part of my business. While I earn very little money directly from writing here this site has enabled me to do other things which do make money – such as put on a conference and start an investment management business.

And as I said above I always appreciate comments from others, critical or not, that lead to a fruitful and thought provoking discussion.

Wow, what a post. I’m curious what your experience will be of Prosper’s IRA compared to Lending Club’s. Probably similar, with some interesting differences. Great note re: diversification within your 147-note account. Thanks for sharing, Peter.

Thanks Simon. The Prosper IRA has gone relatively smoothly. We are using a new custodian (new for Prosper at least), Millennium Trust, so there were some setup challenges but nothing unexpected. Overall, it has been very positive so far.

As always, a good read. I can see why these are among your most popular posts. I wondered if you could speak to how you have set up the P2P-P/BV combo. Did you overlay any filters? For my personal account I have been reinvesting slowly into D and E paper, excluding C on the low end for higher yield possibility and excluding F on the high end because of their wild variability. I’m pleased to hear you still use the service Nathan and I put together.

Thanks Bryce. I was just doing the top 10% grades C-G but I recently added an interest rate filter: 14% – 24%. This will capture the higher rate C’s and lower rate F’s – at least for now. With the rates for the grades changing somewhat regularly I like using interest rates instead of loan grades.

I don’t use the Lending Club auto-investing tool with this criteria so there is no target allocation as such. Instead I use Nickelsteamroller.com and invest through the API. Having said that, one could easily use the Auto-investing tool. Here is the breakdown by loan grade of this Medium Income filter in my portfolio:
D – 68%
E – 24%
F – 8%
G – 1%

Quick question. On your Lending Club Traditional IRA I see that you have been paid ~$150k in P&I but I don’t see that reflected in your total. Are you pulling money out of this account or am I missing something? That seems to be the case on many of your accounts.

That is a common misconception. I have made no withdrawals from any of my accounts. But because these accounts are all a decent age they have cycled through the cash in the account more than once.

Let me explain with an example based on my own accounts. That Traditional IRA account you mention above with $150K in repayments began as a $53,000 investment. Now, it has a value of around $77,000. So, I have gained $24,000 in interest. But every day I am receiving principal and interest payments to the tune of $4,000 a month now. So, in effect I have loaned out more than $150K with just an initial $53K investment. Because I continue to reinvest the cash that builds up in the account.

Hi Ryan, Unfortunately Ohio has one of the most conservative securities administrators and they are not in favor of p2p lending. There is no way around this today unless you are an accredited investor.

I am looking to build up my passive income streams and P2P certainly looks intriguing. Problem is, I live in Massachusetts. Is there anyone here that lives in the forsaken state and can provide guidance? I tried opening an account and it sent me to some partner Folio site, application still pending, but I am wondering if the app does go through what limits are imposed.

Otherwise, these returns are great. I am wondering how much of these double digits returns are a result of the overall froth in the stock market and the overwhelming liquidity provided by the Fed – once rates tighten and start going up, what will happen to P2P?

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